Working Paper: CEPR ID: DP7429
Authors: Per Krusell; Toshihiko Mukoyama; Aysegul Sahin
Abstract: We analyze a Bewley-Huggett-Aiyagari incomplete-markets model with labor-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labor market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks, and a complete set of contingent claims conditional on this risk.We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers? outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model - in steady state as well as stochastic ones - generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting.
Keywords: heterogeneous agents; incomplete markets; matching
JEL Codes: D52; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher levels of unemployment insurance (UI) (J65) | Improved consumption smoothing for workers (D15) |
| Higher levels of unemployment insurance (UI) (J65) | Reduced firm incentives to create jobs (H32) |
| Higher levels of unemployment insurance (UI) (J65) | Higher wage demands due to increased outside options for workers (J39) |
| Productivity shocks (O49) | Limited unemployment effects (J65) |
| Productivity shocks (O49) | Impact on employment moderated by existing labor market frictions (F66) |
| Higher productivity (O49) | Encouragement of job creation (J68) |
| Higher productivity (O49) | Small effect on unemployment in steady-state scenarios (J65) |